93 C.R. - Q. 59

Where all of the shares of a non-resident corporation are owned by a trust whose sole beneficiary is a corporation resident in Canada, dividends paid by the non-resident corporation to the trust that are then paid by the trust to the Canadian corporation will be received as income from a trust and not dividends, unless the trust is a bare trust. Accordingly, if the trust is not a bare trust, s. 113(3) will not apply.

Articles

Kenneth Snider, "Selecting the Foreign Business Entity: A Review of the Canadian Tax Treatment of U.S. Taxes Paid By a Member (Shareholder) of a U.S. Limited Liability Corporation", International Tax Planning, 2002 Canadian Tax Journal, Vol. 50 No. 2, p. 705.

Paragraph 113(1)(a)

Administrative Policy

Canco, which did not prepare a detailed calculation of its exempt surplus, hybrid surplus and taxable surplus accounts, nor of its hybrid underlying tax and underlying foreign tax accounts in respect of FA. FA claimed a s. 113(1) deduction (the “113 Deduction”) equalling the amount of a dividend received from a wholly-owned foreign affiliate (“FA”) based on the general ordering rules in Regs. 5900(1) and 5901(1). Should a more careful review indicate that the dividend was not otherwise fully sheltered by the 113 Deduction, Canco would wish to utilize the adjusted cost base (“ACB”) of the FA shares.

Are detailed surplus account computations essential to support the 113 Deduction?

CRA indicated that if a complete surplus computation is not provided to it, its current general practice is to deny the deduction under s. 113(1). Furthermore, s. 230(1) specifically requires taxpayers to retain records and books of account in such form, and containing such information, as will enable the determination of taxes payable under the Act. An unsupported s. 113(1) claim could be subject inter alia to ss. 152(4), 163(2), 163(2.2) or 239(1), depending on the circumstances.

A broadly worded grant of regulatory authority giving the Secretary of the Treasury the power to issue any regulations or other guidance that might be necessary or appropriate to carry out the purposes of the section accompanies this simple rule.

Cross-border repo financing structure (p. 628)

A simple repo would involve a U.S. holding company selling special preferred shares in a subsidiary U.S. operating company to the U.S. group's foreign parent subject to a forward (re)purchase agreement under which the foreign parent would sell the preferred stock back to the U.S. holding company (or a disregarded LLC subsidiary). Under the substance-over-form principle, U.S. tax law would see this arrangement as secured lending by the foreign parent to the U.S. group giving rise to otherwise deductible interest. In Canada, the U.S. company's preferred shares would normally entitle a Canadian parent to dividends that can benefit from the exempt surplus dividend received deduction. However, prop. reg. 1.267A-2(a)(3) and Example 2 show that when (and if) the regulations become final, repo financings would give rise to nondeductible interest in the U.S.

Paragraph 113(1)(c)

Administrative Policy

Is the US tax paid by a Canadian-resident taxpayer on the income (which also is foreign accrual property income) of an LLC which is owned by it (and is a controlled foreign affiliate) considered to be foreign accrual tax in respect of the LLC?

After noting that the US tax paid paid by the taxpayer would not qualify as FAT, CRA stated that if the taxpayer was a corporation:

any US tax paid in respect of [its] share of the income of the LLC would not be creditable for purposes of subsection 126(1) nor deductible for purposes of subsection 20(12) because the tax would be paid by a corporation in respect of income from a share of the capital stock of a foreign affiliate of the corporation. However…a deduction under paragraph 113(1)(c) would be available in respect of the US tax paid by a corporation resident in Canada in respect of the income of an LLC where a dividend distribution out of taxable surplus is received from the LLC.

If the LLC is a foreign affiliate earning FAPI…U.S. tax paid by the Canadian corporation in respect of the LLC's income will not qualify as UFT, as the definition of UFT - even as amended by Bill C-43 - only applies to taxes paid by a foreign affiliate of the taxpayer, not by the taxpayer itself. [fn 115: … 9703535…] Accordingly, no deduction will be available under paragraph 113(l)(b) in respect of distributions paid out of the LLC's taxable surplus. However, the CRA considers the U.S. tax paid for a year in respect of an LLC's income to be in respect of dividends derived from the shares of the LLC, even if the LLC does not pay dividends in the year for which the U.S. tax is paid. Accordingly, when the LLC pays a taxable surplus dividend, relief from double tax is available in the form of a deduction under paragraph 113(l)(c). [fn 116: … 9703535…9821495…2013-0480321C6 [above]…]

…[A] timing issue remains in this latter context if the LLC is a controlled foreign affiliate and is not able to distribute all of its income each year, as the applicable share of the LLC's FAPI will be required to be included in the member's income in the taxation year in which it is received, without an offsetting deduction for FAT.

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